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CURRENCY MARGINAL UTILITY

It must be made more lucid why the United States Dollar is set to advance sharply in marginal priceagainst other currencies. This is done via marginal analysis.

It has already been mentioned that the stock of a particular good relative to annual production ofthat good is an important factor in determining the marginal price of that good. For example, it is

well known that platinum is perceived to be more valuable than gold. One argument is that it is a lot

scarcerthan gold.

This is also true (but the perception is entirely wrong): the stock of platinum is around 10 tonnes,versus gold at 150,000 tonnes plustherefore platinum is scarcer than gold. But, the amount of goldproduced annually is but a small fractionof the total amount of gold in inventory (c. 1.2%), whereas forplatinum it is a huge multiple (2000%). Whilst it is indeed true that platinum is scarcer than gold, itsobjective value at the margin can change catastrophically if there is even the slightest change inproduction, and/or demand for that production. This was witnessed last year when platinum fell to98% the price of gold, when the norm was around 200%.

Corollary: the relative value of a good bears no direct relation to its scarcity. Thereforethe relative value of a good bears no relation to its perceived abundance

.

How is the United States Dollar like gold? It was aforementioned that gold is supreme in its stocksto flow ratio by many magnitudes. Seeing as gold is so abundant it is surprising that (or any otherabundant good for that matter like the United States Dollar) has any value at all. But the question as tothe goods value and potential value has already been answered for were that not to be the case, and the potentialvalue of the good to be in doubt then it would not

exist in stock in the first place!

The total stock of money (M3) for each of the currencies must be arranged from the highest to thelowest. The rate of monetary growth for each of the currencies in regular economic circumstances

is not vastly different, so this arrangement will be the currency analogy (below, left hand side) ofthe stocks to flow chart (below, right hand side). It can quite easily be shown that the United StatesDollar is by far the greatest in terms of nominal value of M3. Considering that goods totally unrelatedto the output of the United States, as well as derivatives, have a greater tendency than not to bepriced in Dollars.

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The question that the Dollar is abundant and likely to get more abundant is not in doubt. After all,the monetization process implies just that. But it must be also remembered that the nominal debasement

for each of the non Dollar currencies will be vast compared to how much of the currency is already in inventory.Whether the Europeans decide to monetize a further 200m and the Americans a further $600m, orwhatever, is irrelevant.Whatever the Americans do, it will be a much smaller fraction of the amountof Dollars whose value has already been amortized by the mere fact

that they exist already incirculation.

Corollary: the mere fact that a particular good exists means that its value cost has alreadybeen amortized. For were that not to be the case, the good would not exist in the first place.

It is commonly and erroneously perceived that because there are fewer Euros around than there areUnited States Dollars and that the Europeans will be monetizing less, that the Euro is therefore thecurrency to be in to maintain relative value. That is false. Value, as we have shown on the precedingpage does not correlate to scarcity (that is the falsehood in the quantity theory of money) nor does itcorrelate to production.Value is related to both concurrently via the stocks to flow ratio.

The author is not advocating purchasing United States Dollars as an asset class over property orbullion. But if it comes to a question of which currency to own out of need, then the United StatesDollar wins by a wide margin that is why a multiple of the current value of the Dollar index islikely. All the currencies are sinking concurrently, but the United States Dollar is sinking the slowest.

Each and every global currency is in the same predicamentthat of inconvertibility. Thefinancial crisis is a result of inconvertibility and that alone for inconvertibility leads to theinstability and gyration of interest rates that induce booms and busts in the broad economy.However, the problems of inconvertibility are then massaged into a United States Dollarcrisis via arguments of too many Dollars are being printed. It has been shown that thisargument is false. Buy the United States Dollar.

Postscriptum

The chart below is global GDP deflators since 1960 from the OECD. The GDP deflator for acountry is a broad measure of the price index (2007 is based to 100). The rate of change of the GDPdeflator is analogous to the rate of inflation. It was pointed out to me by a fellow Austrian economistthat this chart shows that there is an error in logic in the quantity theory of money, and that myexplanation of currencies based on utility is the only way the following can be explained. A smalltriumph. A Noble prize is not needed to confirm it.

The monetary base of the United States Dollar, as has been previously shown, is the largest by asignificant measure compared to any other currency. According to the quantity theory of money,prices in the United States should be just as volatile as anywhere else with the same fiduciarycharacteristics (i.e. money growth is similar).They are not. The United States deflator series (thick

orange) is remarkably more stable than any other country (even their neighbour Canada in turquoise.)The series for the United States price index sticks out like the stocks to flow ratio for gold.

Dr. Krugman does not like Austrian economics [i.e. marginal analysis in the Mengerian tradition, thesubject I was continuing in the currency analysis piece]. A PhD does not rectify his idiocy (andespecially one in economics.)

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